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Case Study - Hyundai: Leading the way in the global car industry

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Asked: Feb 21st, 2016

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Case
Study - Hyundai: Leading the way in the global car industry

The
global car industry is one of the largest and most internationalised business
sectors. There are 17 major global car companies, each of which produces over 1
million cars a year. The Hyundai Motor Company (Hyundai) is South Korea's
number one car maker and the 10th largest in the world. It sells vehicles in
over 190 countries producing about a dozen car and minivan models, plus trucks,
buses and other commercial vehicles. Popular exported models in the United
States are the Accent and Sonata, while exports to Europe and Asia include the
GRT and Equus. During the global recession in 2008, while most car companies
suffered steep sales declines, Hyundai managed to earn US$1.3 billion - putting
it among the best performers in the global car industry.

The industry

In
2009 global car sales fell to near-record lows due to the global recession,
which started in late 2008. Industry car profit has suffered due to significant
excess production capacity. Although there is a capacity to produce 80 million
cars worldwide, total global demand has been only 60 million a year. There have
been some acquisitions throughout the industry with Jaguar and Land Rover being
acquired by India's Tata Motors, and Volvo being purchased by China's Geely
Motors. Consistent with new trade theory, the requisite scale compels car
makers to target world markets, where they can achieve economies of scale and
maximise sales.

The industry in
South Korea

Korea
is the largest emerging market in the Asia-Pacific region. Yet the car maker
market in Korea is too small to sustain indigenous carmakers such as Hyundai and
Kia. Thus, Korean car makers sell aggressively in foreign markets. Fortunately,
Korea holds numerous competitive advantages in the car industry. The country is
a world centre of new technology development. It has abundant, cost-effective
knowledge workers who drive innovations in design, features, products and
product quality. The country also has a high savings rate, with massive inward
foreign direct investment, which ensures a ready supply of capital for car
makers to fund R&D and other ventures. Collectively, Korea's abundance of
production factors - cost-effective labour, knowledge workers, high-technology
and capital - represents key location specific advantages.

Korean
consumers are very demanding, so car makers take great pains to produce superior
products. Intense rivalry in the domestic car industry ensures that car makers
and car parts producers improve products continuously. The Korean economy is
dominated by several conglomerates called chaebol.
They include Hyundai, Samsung, Daewoo, LG and SK, and account for about 40 per
cent of Korea's GDP and exports. These large firms have expanded by borrowing
from their own banks.

The
Asian financial crisis of 1997 resulted in the Korean government imposing
stringent accounting controls on many of these firms. In particular, the manner
in which the Daewoo group collapsed and the subsequent takeover of Daewoo
Motors’ operations by General Motors (GM) has resulted in a rethink in terms of
strategy and regulatory control in the car sector. The government cooperates
closely with the business sector, protecting some industries, ensuring funds
for others and sponsoring still others. The government promoted imports of raw
materials and technology at the expense of consumer goods and encouraged
savings and investment over consumption. Partly due to these efforts, Korea is
home to a substantial industrial cluster for the production of cars and car
parts. Accordingly the nation benefits from the presence of numerous suppliers
and manufacturers in the global car industry.

In
years past, Hyundai also benefited from a weak Korean won, making the prices
for home and cars cheaper for customers in Australia, Europe and the United
States who buy imported cars in their local currencies. Hyundai owes much of
its success to favourable international exchange rates.

Background on
Hyundai

Hyundai
was founded in 1947 as a construction company by Chung Ju-yung, a visionary
entrepreneur from a peasant background. By the 1970s the firm had become a car
company and began an aggressive effort to develop engineering capabilities and
new designs. In the 1980s Hyundai began exporting the Excel, an economy car
with a US$4995 price tag, to the United States. This car was an instant
success, and Excel exports grew to 250,000 units per year. But problems
occurred and the car fell from favour. The Excel suffered from quality issues
and had a weak dealer network, which did little to dispel negative imagery or
generate substantial new sales. Buyer confidence waned in the late 1990s.
Hyundai’s brand equity weakened. In response to these quality complaints,
Hyundai initiated major quality improvement programes and introduced a ten-year
power-train warranty program, unprecedented in the car industry. The strategy
was a major turning point for Hyundai.

Geographical
diversification

In
1997 Hyundai built a factory in Turkey, giving the firm convenient access to
the Middle East and Europe. Next, Hyundai opened a plant in India and within a
few years became the country's best-selling brand of imported cars. In 2002
Hyundai launched a factory in China, doubling production. Hyundai is aiming for
20 per cent share of the Chinese car market. The firm also partnered with
Guangzhou Motor Group, winning entry to China's huge commercial-vehicle market.
In addition to gaining access to low-cost, high-quality labour in emerging
markets, Hyundai hopes its presence in the local showrooms will improve
consumer awareness and drive sales in new markets.

Hyundai
uses FDI to develop key operations around the world. Management chooses
locations based on the advantages they bring to the firm. By 2006 have
established plants in Iran, Taiwan, Vietnam, Venezuela, and numerous other
countries around the world. The firm also has R&D centres in Europe, Japan
and North America. It has distribution centres and marketing subsidiaries at
various locations that deliver parts to its expanding base of car dealers
worldwide. Hyundai also has regional headquarters in Asia, Europe and North
America. To guarantee control over production and marketing, Hyundai has
internalised many of its own operations.

To
remain competitive, Hyundai employs inexpensive labour and sources imports -
engines, tyres, electronics - from low-cost suppliers. The firm has entered
various collaborative ventures to cooperate in R&D, design, manufacturing
and other value-adding activities. These allow Hyundai access to foreign
partners’ know-how, capital, distribution channels, marketing assets and the
ability to overcome government-imposed obstacles. For example, Hyundai
partnered with Daimler-Chrysler to develop new technologies and improve supply
chain management. Compared to Japanese or Western rivals, Hyundai has superior
cost advantages in the acquisition of high-quality inputs.

While
Japanese car giants such as Toyota and Honda rely heavily on US sales for their
profits, Hyundai is more diversified. In 2008 the US market accounted for only
14 per cent of Hyundai’s total sales, while China, India, Russia and Latin
America represented a combined 35 per cent of its sales.

Hyundai
recently launched its first luxury model, the Genesis. The Genesis was named
‘North American Car of the Year’ at the 2009 Detroit Auto Show, trumping
industry favourites such as Audi A4, Jaguar XF and Cadillac CTS-V. The Genesis
was noted for its luxury touches, smooth ride, high-quality and US$33,000
price.

A
recent marketing innovation is the ‘Assurance Program’, under which a buyer can
return a recently purchased car if he or she loses their job within one year of
purchase. The program even pays the customer’s lease payments for up to 90 days
while they search for a new job. Owners who elect to keep their cars are not
required to reimburse Hyundai.

Recent events

Like
other car makers, Hyundai has also experienced problems with excess capacity.
In 2009, due to unwanted inventory, the firm slowed production of its Alabama
plant in the United States and laid off hundreds of employees at regional
headquarters in the United States. It also cut production by some 25 per cent
at plants in Korea. But the firm continues to launch new marketing campaigns,
and replaced General Motors as the official car sponsor of the Academy Awards.

Hyundai
has pursued internationalisation aggressively. While many local firms struggle
to stay afloat during a crisis, Hyundai is seeking to expand. Hyundai sees the
crisis as an opportunity, with plans to emerge even stronger. Hyundai has
improved quality and increased sales against all odds. Given its focus on
quality, energy efficiency, cost-control and customer satisfaction, perhaps
Hyundai is the new standard bearer in the global car industry.

Source:This
case was adapted from Cavusgil et al (2012, pp.171-73)

Case Study Questions

1.
What are the roles of comparative and
competitive advantages in Hyundai’s success? Illustrate your answers by
providing specific examples of natural and acquired advantages that Hyundai
employs to succeed in the global car industry.

2.
In terms of factor proportions theory, what
abundant factors does Hyundai leverage in its worldwide operations? Provide
examples and explain how Hyundai exemplifies the theory.

3.
Discuss higher Hyundai and its position in the
global car industry in terms of Porter's Diamond model. What is the role of
firm strategy, structure and rivalry, factor conditions, demand conditions and
related and supporting industries to Hyundai’s international success?

4.
Consistent with Dunning’s eclectic paradigm,
described the ownership-specific advantages, location-specific advantages and
internalisation advantages held by Hyundai. Which of these advantages do you
believe has been most instrumental in the firm's success? Justify your answer